The NZD rose and NZ yields firmed across the curve after Q4 NZ labour market data highlighted the flexibility and resilience of the NZ economy. The 4.9% unemployment rate from the Stats NZ were much stronger than market and RBNZ picks, boosted by rising construction sector employment. The 1.5% annual increase in private sector salary and wage rates was the lowest since early 2017, It is expected the tightening labour market to push wages higher in 2021. Stronger than expected labour market and inflation outlook confirm the RBNZ to be much closer to its twin monetary policy objectives than thought earlier. We are likely to see the unemployment rate trend lower from here. OCR cuts look to be well and truly off the radar, but it is too soon to contemplate hikes given the global financial current , potential NZD impact and scope for the RBNZ to use other policy levers to cool rampant housing market.
A bit more stability appeared to return to equity markets following the retail-trading frenzy of late last week, with modest gains in US equity indices, helped by strong corporate earnings from Amazon and Alphabet (S&P 500 +0.4%, Dow +0.2%, Nasdaq +0.6%). European equity indices were generally in positive territory (Eurostoxx 50 +0.5%, DAX +0.70%, FTSE 100 -0.1%) ahead of key earnings reports. Stocks were generally firmer in the Asian session, with PBOC actions to reduce liquidity dampened the lift in Chinese equity indices. Shrinking US and Chinese oil stockpiles and pledge by OPEC+ that it will act to clear the oil surplus provided a modest boost to oil prices. Other commodity prices were generally firmer.
Negotiations between Biden and Senate Republicans are continuing over the USD1.9 tr fiscal package. The US Senate has voted 50-49 and the House 216-210 to advance the budget resolution. Treasury secretary Yellen noted it was imperative to enact the USD1.9tr package, as "the benefits of acting now - and acting big - will far outweigh the costs over the long term".
January gains in US employment from the ADP measure (174k versus mkt: 70k) topped expectations, pointing to some upside risk from this weekend's payrolls print (mkt: 100k). Services PMI's in the US also strengthened by more than expected, at 58.7 for the Services ISM (mkt: 56.7), with new orders (61.8), and employment (55.2) making solid gains. The US Markit services PMI firmed to at 58.3 (Mkt: 57.4). Global PSI's highlighted the uneven outlook, with the Australian PSI (55.6) was little changed, the Chinese PSI (52.2 versus mkt: 55.5) at its lowest level since April 2020 and with weak PSI's for the UK (39.5 versus mkt: 38.8), Germany (46.7 versus mkt: 46.8) and Eurozone (45.5 versus mkt: 45). Inflation in the Eurozone (0.9 % yoy, core CPI 1.4% yoy) surprised to the upside.
There was little market reaction from yesterday's speech by RBA Governor Lowe. Lowe noted that "very significant monetary support will need to be maintained for some time to come" with the inflation and employment outlook "well short of our goals". As such, the RBA decision to extend its quantitative easing program by a further AUD100bn by mid-April and signal it will not lift the 0.1% cash rate until 2024. However, Lowe signalled that the term funding facility (TFF) may be wound up by mid-year given the improved environment for funding and credit, with a decision on the 0.1% target for the 3-year bonds to be made later this year. House prices in Australia are now rising and the RBA is keeping close tabs on lending standards. Interest rate sensitive pockets in Australia appear to be heating up, with a stronger than expected 10.9% December lift in building approvals (house building +15.6% mom), and the AiG Performance of construction index at its highest level since mid-2017.
FX update: The NZD has held onto most of its post-HLFS gains, trading in a 0.7180 to 0.7230 USD overnight range. The strengthening AUD overnight saw the NZD ease back to 0.944 AUD, but the NZD was still one of the strongest performers in the G10 currency league overnight. We expect the strong tone of local data, the likelihood that the RBNZ will be one of the earliest central banks to raise policy rates (risks are shifting to the RBNZ hiking sooner than oud mid-2023 core view) and the strong export commodity price backdrop to remain NZD supportive.